Zark's

Big Economic Picture

This weekend I watched Tom Hank's A Hologram for the King, for the first time.  Perhaps not as memorable as his most acclaimed, including The Post, I enjoyed it thoroughly.  A sub-theme in the film is how we compete with China.  His character had been a board member for Schwinn Bicycle and responsible for shipping manufacturing over to China, only to lose complete control of the market.  When asked if he would do something different in hindsight, he responds, 'It was complicated.'  The implication was the outcome was regrettable, but some things, like swimming against the tide are impossible.

(Photo Credit: NOAA)

 With the Tom Hanks movie in mind, I asked a friend today what he thought the western world could do against this tide (or it feels more like the swirl of water down a drain).  My friend is an exec for a tech company, and he replied that for manufacturing, U.S. companies should focus on the high-end, high-profit products and simply leave the lower profit products to the lowest labor source.

No doubt execs from Australia to China to U.K. would like the same opportunity.  This past week Bernie Sanders announced a Guaranteed Jobs Plan.  It would guarantee everyone a job at $15 an hour with health benefits.  My many Republican friends scoffed, as well as several Democrat friends and colleagues. 

The world population is 7 billion, almost double of the 4 billion on the planet in 1974.  We could not feed the planet without modern agricultural efficiency.  Currently we are on a runaway treadmill - we must continually develop technology to keep the planet alive.  Dare I suggest that first, we need to address population growth?  Second, we need a big picture economic strategy.  It is more than tariffs.  It is more than training and education.  We must find a strategy for all humans to have a quality of life and better future for their children. 

Seed Sales are Down?

American corn
Image Credit: Doug Wilson, USDA

Mmm.  A couple of data points - Soybean, Corn Futures Hit New Lows tells that corn slid to its lowest level in 3 years.  The reason?  The fall harvest is going to be the largest in U.S. history.  Almost 12 percent had been harvested last Sunday with inventories of 824 million bushels.  Corn futures for December delivery were selling for $4.39 a bushel.

Last year was a down year for corn production because of severe drought in the Midwest.  (It is interesting to remember in 1960 total U.S. corn production was a little under 4 billion bushels.  This year USDA is estimating 13.8 billion bushels.) 

Monsanto's losses widen as seed sales decline tells that Monsanto sold  fewer genetically modified seeds in the fourth quarter.  The company lost 47 cents a share for the last quarter.  This is traditionally Monsanto's weakest quarter since farmers will buy their spring supplies in the next quarter.

Unknown is whether the lower seed sales are because farmers are turning away from the genetically modified seeds, or whether they will actually be planting less corn in the near future.

 

 

 

For Whom the BlackBerry Tolls

BlackBerry to Take Nearly $1B Charge on Unsold Phones tells the Wall Street Journal.  Of course, that publication is more interested in the money.  More grievous to me is the layoff of 4500 employees. 

The whole story saddens me.  It once had over half of the smartphone market, but now has less than 3 percent.  I was very happy with my BlackBerry for 4 or 5 years until I purchased an Android three years ago. 

Economists describe this as creative destruction - how market forces choose better businesses.  As an engineer, I consider it an example of zero-sum.  With finite or limited resources, the only way someone accumulates great wealth is at the expense of others. 

Nokia once was the king of cellphones, but they were recently purchased by Microsoft, or else they would have suffered a fate similar to Blackberry. 

Things happen fast, don't they?  It reminds me of the Big Data axiom, called the Matthew Principle - the rich get richer.  (A loose interpretation of Matthew 25:29)  Until they stumble.

 

 

No Middle Class Without Unions

Ultrasonic Welding
Image Credit: General Motors

Mention the word,'union', in most professional crowds, and the image is negative.  Unproductive, non-flexible (not my labor category), and poor quality (soda bottles welded into the gas tank). Those that lived in the 1970s and 1980s grew weary of labor strikes.

American automobile companies were clocked by the Japanese in the late 1970s and 1980s because of cost and poor quality, and unions were part of the problem. 

Then in the 1990s and 2000s, companies no longer had to bargain with unions.  They simply moved to another state (such as Boeing moving production to South Carolina) or more frequently offshore.  With the catch-phrase, 'shareholder value', companies abandoned community goals and alliances.  It soon affected professional labor such as engineering.  Companies such as Intel boasted they need never hire another American engineer.

Mmm.  In retrospect, I think unions raised everyone's boat.  I don't see wages increasing to sustain a middle class unless unions regain bargaining and political strength.  (Such as demanding balance of trade with our trading partners.) 

 

Why not $15 an hour for fast-food workers?

Yesterday morning I was listening to Phlash Phelps on Sirius Radio.  (I enjoy a good DJ - it makes listening a little tangy.  Remember Wolfman Jack in American Graffiti?)  A caller began laughing about fast food workers striking for $15 an hour wages, as if it were incredulous. 

Striking fast-food workers protest minimum wage jobs in nearly 60 cities, seek $15 an hour, explains that these strikes targeted McDonald's, Burger King, Wendy's, and Yum Brands.  (The current federal minimum wage rate is $7.25 an hour.)  Their current full-time workers make about $15,000 a year. 

To recall some of the minimum wage rates -

July 24, 2007 - $5.84
July 24, 2008 - $6.55
July 24, 2009 - $7.25

I am sympathetic to anyone attempting to find a job in this economy.  The gap between the haves and have-nots continues to increase.  This country arguably had a better quality of life when the gap between the highest and lowest paid workers was not measured in astronomical units.

So why not $15 an hour for fast-food workers?

 

 

Manufacturing a Manufacturing Comeback

Ford Focus manufacturing line at the Michigan Assembly Plant
Image Credit: Ford Motor Company

Perhaps you missed the press about the U.S. manufacturing summit held Thursday (22 August) in Orlando.  Bill Simon, Walmart's U.S. president and CEO said, "But the middle has eroded...  Most people agree it can't go on like this."

During my morning swim, I somehow began contemplating how the loss of worker unions has eroded the middle class.  I'll chew on this and post something about it over the Labor Day weekend.

But back to the manufacturing summit.  Commerce Secretary Penny Prtizker announced $1.1T in exports for the first 6 months of the year.  That is double 2003's yearly exports.  There are market forces enticing U.S. manufacturing.  Transportation costs continue to rise and foreign labor costs have increased substantially  American worker productivity continues to rise, further reducing foreign labor cost advantages.

Although Walmart has been associated with low-cost Asian goods, it originally focused on American-made products.  But to attract the attendance of 7 governors and a cabinet secretary, Walmart flexed its influence.  Its suppliers are well aware of its influence and with Walmart promoting U.S. manufacturing, some savvy suppliers will figure out how to balance low cost and the new-found desire for home-based manufacturing.

Perhaps Walmart has read Henry Ford's autobiography where he identifies well-paid employees as valuable customers.  The same is true for a middle-class retailer.  If the middle class doesn't have jobs, they won't be filling shopping carts at Walmart.

This is a good thing.

 

Philadelphia Borrows Money to Open Schools

Image Credit: City of Philadelphia

In the 50s and 60s, Philadelphia was beamed into living rooms around the nation as teenagers learned the latest songs and dances on American Bandstand.  It is also the city that has been  captured in movies such as Rocky and The Invincible.  The opening of the The Invincible is gritty black in white, with Jim Croce's I Got a Name adding to the tenor. 

It is a proud city, much like Detroit, having contributed much to the nation's progress and the standard of living we enjoy.  It was blessed with waterfront and rivers, allowing development as a manufacturing powerhouse.  But because of global competition, cities such as Detroit, Chicago, St. Louis, and Philadelphia lost their foundations of middle-class jobs and families.  (Remember the story was that manufacturing jobs would be replaced with higher-paying information worker jobs.)  It is ironic that we will aid a city struck with a hurricane or tornado, but austerity if not shunning, is the response to economic storms.

I wonder if this national detachment to the plight of down-on-their-luck cities and people is in part due to atomization of culture.  By atomization, I mean the detachment of the individual from churches, families, and life-long employers.  Instead of being part of something, individuals have become ions, facing by themselves anything that comes.

Philadelphia Borrows so its Schools Open on Time troubles me on several levels.  First, the economic stress of the past decade is bringing down the former manufacturing cities.  Like the boxer Rocky, they can only take so many hits.  And we have many cities that are in similar distress.  Second, this nation has always recognized its success was founded on the availability and quality of public education.  I acknowledge there are problems with it, but let's don't throw the baby out with the bathwater. 

Third, as much as I grieve and empathize with storm victims, I have the same response for the pensioners and residents of these cities.  Somehow, we must manufacture a nation where tomorrow is eagerly anticipated as better than today.

 

China Predicted to Surpass U.S. Oil Imports This Year

Image Credit: U.S. Energy Information Administration

The graphic on the left is pretty explanatory.  In October of this year, a tipping point will be reached where China becomes the world's largest oil importer.

That is significant for at least of couple of reasons.  First, the U.S. is reducing its dependency upon foreign oil imports more rapidly than anticipated only three years ago.  That helps the trade deficit substantially. 

On the other hand, the economic dragon of Asia is going to be uncomfortably at the mercy of petroleum exporters.  I wonder whether China will determine it must protect its petroleum supply line the way the United States has done for the past 40 years?   Mmm.  Interesting thread, isn't it?

One other observation from today's news.  ITC Bans Samsung Imports.  Your Move, Mr. Obama tells the International Trade Commission has ruled Samsung has violated Apple's patents.   The ITC ban of the Samsung products can be overruled by the President. 

Maybe, just maybe, we should give Apple what it wants - a ban of Samsung and HTC phones.  Then because Apple will have such a monopoly on smart phones, the Antitrust Division of the USDOJ should begin proceedings to break up Apple.  They know the company well, because a headline on their website is Justice Department Issues Statement on U.S. District Court Ruling that Apple Violated Antitrust Laws.

 

Living With Paywalls

Image Credit: U.S. Army

Mmm.  This month, my favorite newspaper website, the Washington Post, enacted a paywall.  Last year I had blogged, Is the Golden Age of Internet Over?  Even then, more and more media outlets were creating paywalls.  I receive a daily print newspaper, but its website doesn't provide the global perspective that I desire.  Nonetheless, I support the local newspaper. 

The real issue with paywalls is that everyone would like to charge readers with a $200 annual fee.  Sheesh.  Many don't have the discretionary income to pay for two or more of these paywalls.

Instead of subscribing to the Washington Post firewall, I decided to pay a little extra and subscribe to the New York Times.  (I didn't subscribe to both.)  They throw in a smartphone app in the deal, which I greatly appreciated on my last business trip. 

I don't intend this to be an advertisement for the New York Times, but I have discovered the subscription saves me time, because I don't visit the almost dozen websites that I used to read daily.  And as I commented earlier, the smartphone app keeps me informed without cycling through my website list.

Mmm.  The golden age of the internet is probably over.  I think the structural change in the world's economy killed free access.  Instead of a Brave New World, it is a A la carte world.

 

 

Monopoly Rents - When Companies Charge as Much as They Can

  Paul Krugman, the economist, has been blogging about 'Monopoly Rents' this week.  Today in Profits Without Production, he explained it.  It is when a company charges a consumer what it can, not what the product is worth.  Pure capitalists would argue however, that whatever a consumer is willing to pay should be its value and price.

The American Industrialist Henry Ford did not have that philosophy.  He wanted to produce something that the consumer could afford and provide great value.  His automobiles used parts commonly stocked in hardware stores so that the consumer could repair the Model A or Model T themselves.  But I digress.

Krugman uses Apple as the example for monopoly rents.  Apple is enjoying unprecedented profits because the price of the product is far in excess of what it costs to manufacture.  The difference between a fair profit and an Apple profit is a monopoly rent.  It represents what the company can charge because it does not have adequate competition. 

Krugman asserts that monopoly rents are dragging down the economy.  It isn't just Apple.  Think the airlines with their many service charges, or your wireless carrier.  These companies are profiting because they can, not because they are providing that value to the consumer. 

He uses an interesting comparison.  General Motors at one time had tremendous factories an enormous workforce, about 1 % of the total American workforce.  General Motors produced profit because it manufactured something.  Apple in contrast, has very few employees and does very little manufacturing in the U.S.